Next Fed Chair Will Help Determine Pace Of Interest Rate Hikes

President Trump could ask Janet Yellen to stay on as the Federal Reserve chair, but other names are also circulating.

Pablo Martinez Monsivais
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Originally published on October 25, 2017 5:10 pm

President Trump says he is very close to making a decision about who will lead the Federal Reserve once Janet Yellen's term expires in February.

The Fed chair is often called the second-most-powerful person in Washington, after the president. By steering interest rate policy, the Fed chair affects economic growth, the pace of job creation and inflation.

The Fed also regulates banks and responds to financial crises — it played a massive role in dealing with the Great Recession by cutting interest rates to record lows and buying trillions of dollars in bonds. So it has a big effect on our economic well-being.

There are still a handful of names floating around. In an interview on Sunday on Fox Business News, Trump mentioned three names: John Taylor, an economist currently at Stanford University's Hoover Institution; Jerome Powell, a current Fed governor; and Yellen, the current Fed chair.

Taylor is probably the easiest candidate to contrast with Yellen. He is the author of something called the Taylor Rule, which is essentially an equation that takes the current growth rate and level of inflation and determines where the Fed should set interest rates. It could put the Fed's decisions on interest rates on autopilot. Some conservatives in Congress have advocated for it.

But critics, including Yellen, say it is not sensitive enough to what is happening in the real world. Taylor has said he would be more flexible than his academic work might suggest. But there's little doubt he would raise interest rates faster than Yellen. Taylor criticized the Fed for holding interest rates too low after the financial crisis, and he continues to believe that.

Powell would probably also be inclined to raise rates faster than Yellen, but not by a lot. He is a former investment banker and served as undersecretary of the Treasury under the first President Bush. Of all the candidates, Powell would probably provide the greatest level of continuity with Yellen's approach.

Trump could decide to keep Yellen at the Fed. Trump was very critical of her during the presidential campaign, but several times since then he has said he thought she has done a good job. And he repeated that during the Sunday interview on Fox Business News.

"I also met with Janet Yellen who I like a lot. I really like her a lot," Trump said.

In some ways that's not surprising. The president is, after all, a former real estate developer. Real estate developers love low interest rates, and low rates have been the hallmark of the Yellen Fed.

So why not stick with Yellen? There are certainly people on Wall Street and in the business community who would be fine with having Yellen reappointed. After all, low rates are good for stocks and many businesses as well.

There have been several other names in the mix including Gary Cohn, who heads Trump's National Economic Council at the White House, and Kevin Warsh, a former Fed governor.

There are multiple reports, quoting unnamed White House sources, that Trump has told aides Cohn is out of the running and that Trump wants Cohn to remain in the White House and work on the tax overhaul.

Warsh was once considered the front-runner. But he, too, has advocated for higher interest rates. In fact, when he was a Fed governor he criticized the Bernanke Fed for holding rates too low during the response to the financial crisis. Warsh warned that the policy would very likely lead to runaway inflation. That didn't happen. In fact, inflation has stayed extremely low. So Warsh called it wrong. Still, he has continued to be an advocate for higher rates, which Trump doesn't favor.

Some analysts are suggesting that Trump could reappoint Yellen and get his low rates, and then appoint Powell as vice chair, since the position is now open. Doing so would give Trump the interest rate policy he wants but also move a conservative and a Republican into the Fed's No. 2 position.

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ROBERT SIEGEL, HOST:

President Trump says he is very, very close to announcing who he wants to see lead the Federal Reserve after Janet Yellen's term expires in February. Some have called the Fed chair the second-most powerful role in Washington after the president. And to review the candidates for the job, we are joined now by NPR economics correspondent John Ydstie. Hiya.

JOHN YDSTIE, BYLINE: Hi, Robert.

SIEGEL: First, why is being Fed chairman such a powerful thing?

YDSTIE: Well, of course, it's about our pocketbooks. By steering interest rate policy, the Fed chair affects economic growth, job growth, inflation. And so the Fed can have a huge effect on our economic well-being.

SIEGEL: Who's thought to be under consideration for the chairman's job?

YDSTIE: Well, most recently, in an interview on Sunday on Fox Business News, Trump mentioned three names - John Taylor, an economist currently at Stanford University, Jerome Powell, a current Federal Reserve governor, and the current chair, Janet Yellen.

SIEGEL: Let's take them one at a time then. First, John Taylor - what might we expect if he were leading the Fed?

YDSTIE: Well, actually, Taylor is probably the easiest candidate to contrast with Yellen. He's an economist and the author of something called the Taylor rule. It's essentially an equation that takes the current growth rate and the level of inflation and determines where the Fed should set interest rates. If implemented, it could put Fed decisions on interest rates on autopilot. Some conservatives in Congress have advocated for it, but critics, including Yellen, say it's not sensitive enough to what's happening in the real world. Now, Taylor says he would be flexible, but he has criticized the Fed for holding interest rates too low after the financial crisis, and a Taylor Fed would no doubt raise rates faster than the Yellen Fed.

SIEGEL: OK. That's Taylor. We can remember him. He's got algorithm.

YDSTIE: He does.

SIEGEL: And now we'll go on to Mr. Powell.

YDSTIE: Yeah. Powell is a former investment banker and a conservative appointed by Barack Obama, though. Many analysts suggest he would be inclined to raise rates faster than Yellen but probably not a lot faster. Powell is a former investment banker and had a top Treasury post under the first President Bush. Of all the candidates, I would say Powell would probably provide the greatest level of continuity with the Yellen Fed.

SIEGEL: Unless Janet Yellen herself, who would be the third possibility, were named to another term.

YDSTIE: Well, that could happen. Trump was critical of her during the presidential campaign, but several times since, he said he thought Yellen had done a good job. And during the - that interview last Sunday, he had this to say.

(SOUNDBITE OF ARCHIVED RECORDING)

PRESIDENT DONALD TRUMP: I also met with Janet Yellen, who I like a lot. I really like her a lot.

YDSTIE: And in some ways, that's not very surprising. The president, after all, is a real estate developer, and real estate developers love low interest rates, and that's been the hallmark of the Yellen Fed.

SIEGEL: Couple of other names have been in the mix, including Gary Cohn, who heads Trump's National Economic Council at the White House, and Kevin Warsh, a former Fed governor. Are they seen as being out of the running now?

YDSTIE: Well, with President Trump, you never know, but there are multiple reports today that, according to sources, Trump says Cohn is out of the running and that Trump wants him to stay at the White House working on the tax overhaul. Warsh was once considered the front-runner, but he too has advocated for higher interest rates. In fact, during the response of the financial crisis, when he was a Fed governor, he criticized the Bernanke Fed for holding rates too low, warning that it would likely lead to runaway inflation. That didn't happen. Inflation stayed extremely low. So he called it wrong and yet he continues to advocate for higher interest rates, which, as we said, Trump doesn't favor.

SIEGEL: One thing that we know about Donald Trump and economic policy is that he watches the Dow very closely. I mean, he's constantly mentioning the markets and how well - his spokeswoman at the White House is always telling us, why aren't you talking about how well the market is doing? Do we know what Wall Street, what the market would like to see in the way of a new Fed chair?

YDSTIE: Well I think the market would be happy for a continuation of Yellen because she's kept rates low, and low rates are good for stocks.